Energy speculators: Sorting out the role of speculation in volatile energy markets matters to all of us

Re: Energy speculators

HOUSTON CHRONICLE

Published
5:30 am CDT, Sunday, August 9, 2009

Americans don't want a repeat of last summer's nightmare of doubling oil prices that brought $4 gasoline. That message is being heard by federal regulators in a position to do something to prevent an instant replay of 2008.

The Commodity Futures Trading Commission last week concluded hearings to examine the role of speculators in the market spike that brought American consumers a season of pain at the gas pump in 2008. The hearings revealed spirited disagreements about just who, exactly, is responsible for last summer's wild gyrations in oil prices.

Indeed, no one came forward with convincing data to pin blame definitively. Following a week of public comment, commissioners will create a rule-making process aimed at moderating market fluctuations. The shape and scope of these rules will matter to us all.

While headlines during those months of $4 gasoline focused mostly on huge profits made by the oil companies, there was also a memorable outcry over the enormous sums accumulated by speculators outside the traditional areas of petroleum consumption and production. Many market observers believe these speculators were the real drivers behind the quick surge to $147-per-barrel-oil that brought the industry its record profits — and the full outrage of American public opinion.

Some were caught betting the wrong way as markets turned down and lost their overnight gains almost as quickly, but energy consumers were the ones really trapped in the costly middle, as traditional rules of supply and demand were overridden by the flow of speculators' dollars into the oil markets. We side with those who argue that this wasn't traditional market economics at work, but rather, a dangerous distortion of market dynamics that harmed consumers and which requires closer supervision by regulators.

Sorting out the specifics to create rule-making that would truly insulate consumers from such activity is the commissioners' task. Two points seem obvious:

1) Speculation distorted the energy markets in ways that caused real harm in 2008 and should be reined in by the new rules. Exchange-traded funds that buy oil futures on behalf of small investors played a discernible role in making oil futures prices generally higher. The overriding public and national interest rests with markets that behave rationally and are not permitted to become casinos for investors.

2) A point frequently made by energy industry advocates seems well taken: Not all speculation in the oil markets is destructive; indeed, much of it is necessary for the health of this inherently cyclical industry. Hedging bets about the direction of oil prices is a matter of survival for large-scale consumers of petroleum ranging from refineries to airlines — not to mention the energy producers themselves. As members of the CFTC assess the role of the speculators, that distinction also should be kept in mind.

The CFTC's decisions about the future role of speculators in energy markets are some of the most significant calls being made by regulators in today's marketplace. Let them be judiciously and carefully made.